May 01, 2018

PC Jewellers and More - Our Mistakes

In this article, we share our insights on companies which turned out to be bad investments and also the lessons learnt from these investments.

PC Jeweller

PC Jeweller has seen a massive wipe-out of shareholder wealth over the last few trading sessions. It was one of the biggest gainers for our investors, some of who were seeing a 10X return on their initial investment at Rs 47 to 57. Our new members had PC Jeweller from Rs 250 to Rs 350 post which we had stopped recommendation. PC Jeweller was trading at ~ Rs 600 just a few months back and today it is well below Rs 150 and their seems to be no end to the fall of the stock price.

Fall of Shame

We have exited the stock and the highest allocation to PC Jewellers was just 3%, we trimmed allocation continuously as the stock price started collapsing from its high of ~ Rs 600. Some exited the stock with a profit of 500%, while some exited with a loss of ~ 50%. We controlled the dent it had on our portfolio because we knew the red flags around the company and thus had a low allocation throughout. So what went wrong with PC Jeweller? We don't know! The management is still on teleivision that all is well. But here is what we communicated with our investors.

i) High receivables: Now, noone buys jewellery on credit. PC Jeweller has receivables which are more than 4 years of profits! Most of these are export receivables and there is huge risk that the books were all cooked up.

ii) Promoter selling stake: There are market rumours that the promoters are selling their stake in the company and they are further gifting shares to their relatives to facilitate this sale.

RS Software

We had a proxy investment on the rise of digital payments. RS Software had just one major client - VISA and you should be well aware of the risk that you take when you invest in a company which gets it's revenues from one client. VISA cancelled it's contract with RS Software and the stock price collpased. From a massive 800% gain, we exited only with a 30% - 40% gain over a 3 year holding period. The revenues of the company reflect what went wrong:

Noida Toll

We had an investment in Noida Toll bridge because we were of the view that an increase in traffic on the Delhi-Noida route would generate super strong cash flows for the company. Add to this the growth in advertisement revenues and you had a strong dividend-yield stock which could compound well over a period of time. What better business than a toll way?

The stock price collpased and we lost money in this investment. The total allocation to the portfolio was just 3% and thus the portfolio did not take a major hit. The toll bridge is now free and the company is fighting the case in the Supreme court.

The above table shows how the revenues for the company collapsed, thus eroding shareholders wealth.

Zicom

Growing revenues, improving margins, a big opportunity for one of the largest security systems company to capture the home security solutions market in a large demography like India. Zicom looked like a very good investment - But it collpased from Rs 131 to Rs 41 in a short span of time after our investment.

Another case of exports, inflated receivables, negative cash flow from operations. Coupled with that - Promoter selling his stake continuously. Even now, the promoter is just selling of his stake in the company as shown by the table below:

The stock price plummeted and we were punished for this mistake. However, the allocation for Zicom in the portfolio was 2% because these red flags were always there. Better the quality, higher the allocation - This is has remained our philosophy.

Conclusion

We have made mistakes and we will make mistakes, not knowingly but because of the inherent nature of investing in the stock markets - There are many variables that can go wrong. We have to mitigate the risks and lose little when we go wrong and make a lot of money when we are right!